YRC/Teamster Agreement Moves Ahead

Calling it significant progress, YRC Worldwide (YRCW) and the International Brotherhood of Teamsters (IBT) negotiating team announced some details of their agreement on contract terms going forward. Two critical provisions are a 5% incremental wage reduction and and 18-month cessation of pension payments.

The Teamsters' negotiating team was recommending members approve the agreement. “We are confident this plan balances the need to provide job security while maintaining good quality jobs,” said Tyson Johnson, director of the Teamsters National Freight Division. “This is a tough situation for the company and our members, but we believe this plan protects our members and allows the company to survive the worst freight recession in several generations.”

“In the midst of the worst economic recession in our lifetime our union negotiators have crafted an agreement with YRCW that requires shared sacrifice while preserving good jobs and benefits for 35,000 YRCW workers and their families and tens of thousands Teamster retirees,” said James P.Hoffa, Teamsters General President.

The Teamster negotiating team reported to members the Teamsters had engaged in “an unprecedented amount of financial ‘due diligence’ and operational evaluation of YRCW since the last memorandum of understanding was ratified six months ago.” The IBT siad it had a full-time team of economists, financial analysts and freight experts assembled that had “challenged YRCW’s assumptions about the future of the business and what it needs to survive this downturn every step of the way.”

In a document sent to members, the IBT said, “We have not agreed with the company on many items, including appropriate staffing levels, terminal consolidation and transfers of work and made this explicitly clear to senior management especially during the recent two weeks of negotiations. Nevertheless, we believe, as do the professionals who work for the [IBT], that the economics contained in this Revised Plan create the only plausible scenario that allows YRCW to continue to weather the economic downturn over next 12-18 months.”

YRCW explained that, in addition to a 5% incremental wage reduction, the proposed modified agreement includes an 18 month cessation of union pension fund contributions, which will not require repayment at a later date. "This is another step in our ongoing strategic plan to restore the financial strength of our company," said Bill Zollars, chairman, president and CEO of YRC Worldwide. "Modifications to the labor agreement will help us reduce our cost structure, preserve operating capital and increase our competitiveness."

In addition, YRC Worldwide said it is continuing discussions to address the structural inequities of multi-employer pension plans to determine a long-term solution. Zollars said, "We continue to have ongoing, productive dialogues with all our stakeholders, including the bondholders and pension funds."

If approved by union members, the modifications, as they stand, would create an approximate $45 million per month savings, which begins immediately upon ratification. This grows to an approximate $50 million per month savings in 2010, said YRCW. In exchange, the Teamsters employees would receive options for 20% of the outstanding shares of YRC Worldwide stock, pending shareholder approval. “This will allow them to further share in future company performance through stock price appreciation,” YRCW said. YRC Worldwide also will appoint an additional member to its board of directors who is mutually agreed upon by the company and the [Teamster] negotiating committee, it said.

The IBT issued a Freight Update to members recommending ratification of the deal.

David Ross, a principal with analyst firm Stifel Nicolaus, said the additional 5% wage cut (on top of the 10% wage cut taken in January) would save the company about $100 million per year (or $8 million per month). The 18-month pension contribution termination period (where no pension payments are made and no pension credits are earned by employees) would save the company about $40million per month, or $720 million through 2010. A reduction in health and welfare contributions is included. Instead of a $1 per hour annual increase in August 2009 and August 2010, the hourly increase will be reduced to $0.20 in 2009 and $0.40 in 2010. This should cost the company an extra $1 million per over the next 12 months vs. the extra $6 million per month the contract originally stipulated, estimated Ross.

Ballots are expected to be counted on August 6th, according to IBT. “If ratified, this would likely mean the company hangs on longer than many expect (into 2010),” noted Ross. “Still, while they keep the capacity operating, the less-than-truckload (LTL) industry will remain in a significant overcapacity situation.”

“These further wage concessions give YRCW a large cost advantage (though it still does not restore them to profitability) vs. the competition and may drag down industry wages across the board,” Ross said. He notes that some competitors had already cut wages following YRCW's earlier wage reduction.

“If YRC keeps its capacity in play, as we see no significant pickup in demand this year, it would not surprise us to see more of its competitors modify their wage scales,” said Ross.

Other LTL stocks likely pull back, if ratified. We believe ABFS, SAIA, and ODFL have the most potential downside over the next few months if YRC sticks around and it looks like they may make it into 2010. Those stocks are at least partially baking in a YRC liquidation this year, in our view. CNW and VTNC are also partially baking it in, but we believe they have less downside potential.

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